Liabilities Flashcards
What are current liabilities?
Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets.
What is accounts payable?
Balances owed for goods, supplies, or services purchased on account.
Occurs when there is a time lag between receipt of goods/services and payment for them. Terms usually state a period of extended credit, commonly 30-60 days.
What does 2/10, n/30 mean?
It means a 2% discount if paid in 10 days, or none and due in 30.
What are notes payable?
Written promises to pay a sum of money on a certain date.
Can arise from purchases, financing, or other transactions.
How can notes payable be classified?
They can be classified as short-term or long-term depending on the payment due date.
What are current maturities of long-term debt?
The portion of bonds, mortgage notes, and other long-term indebtedness that will mature within the next fiscal year.
What indicates higher current maturities?
Higher current maturities indicate more financial stress.
What are short-term obligations to be refinanced?
Debts scheduled to mature within one year after the date of the balance sheet or within the operating cycle, whichever is longer.
What conditions must be met to exclude short-term obligations from current liabilities?
- Company must intend to refinance on a long-term basis. 2. Company must demonstrate the ability to refinance.
What is a dividend payable?
Amount owed by a corporation to stockholders as a result of board authorization.
Are undeclared dividends on cumulative preferred stock a liability?
No, undeclared dividends on cumulative preferred stock are not a liability.
When are dividends generally paid?
Dividends are generally paid within a month.
Are dividends in arrears an obligation?
Dividends in arrears are not an obligation until payment is authorized.
How are dividends paid with additional shares of stock reported?
They are reported in stockholders’ equity and are not a liability.
What are customer advances and deposits?
Returnable cash deposits received from customers and employees to guarantee performance.
How is the classification of customer deposits determined?
Classification as current or noncurrent depends on the time between the date of the deposit and the termination of the relationship that required a deposit.
What are unearned revenues?
Prepayment for services not yet rendered.
What is the accounting treatment when payment for unearned revenue is received?
Debit cash and credit unearned revenue.
What happens when the service for unearned revenue is rendered?
Debit unearned revenue and credit the revenue account.
What does the balance sheet report regarding obligations?
It reports obligations for commitments redeemable in goods and services.
What does the income statement report?
It reports revenues related to performance obligations satisfied during the period.
What is sales taxes payable?
A liability account for taxes due to various governments.
What happens if the liability account for sales tax differs from the governmental formula?
The company recognizes a gain or loss on sales tax collection.
What are income taxes payable?
Any federal or state income taxes payable on net income for the current period, as computed by the tax return.
Who is taxable among corporations, proprietorships, and partnerships?
Corporations are taxable; proprietorships and partnerships are not.
How do corporations generally make tax payments?
Corporations generally make periodic tax payments during the year based on estimates of tax liability.
How are accrued wages and salaries reported?
Amounts owed to employees for salaries or wages are reported as a current liability.
What are payroll deductions?
Payroll deductions include Social security taxes, Insurance, Medicare, Unemployment Tax, Income tax withholding, Union dues, and Employee Savings.
What is Social Security tax?
Social Security tax is 6.2% of the employee’s gross pay up to an annual limit of $110,100 (2014). Both employer and employee pay this tax.
What is Medicare tax?
Medicare tax is 1.45% of the employee’s total compensation, paid by both employer and employee, with the employer matching the employee contribution.
What is Federal Unemployment Tax (FUTA)?
FUTA is unemployment insurance at a rate of 6.2% up to $7,000 in compensation, paid only by employers.
What are compensated absences?
Compensated absences are paid absences for vacation, illness, and holidays, relating to rights that vest or accumulate.
What are vested rights?
Vested rights are benefits that an employee retains even if they leave the company.
What are accumulated rights?
Accumulated rights carry over from year to year and are forfeited if the employee leaves the company.
When is vacation pay booked as a liability?
Vacation pay is usually booked as a liability at the pay rate when the pay was earned.
How to record salaries and wages when earned?
Debit Salaries and Wages Expense and Credit Salaries and Wages Payable.
How to record salaries and wages when taken?
Debit Salaries and Wages Payable, Debit Salaries and Wages Expense (for increase in pay amount), and Credit Cash for total amount paid.
What are bonuses?
Bonuses are payments to certain employees in addition to salaries or wages, considered an operating expense and reported as a current liability.
How to record bonuses when earned?
Debit Wages and Salaries Expense for the amount of Bonus and Credit Salaries and Wages Payable for the amount of Bonus.
How to record bonuses when paid?
Debit Salaries and Wages Payable for the amount of bonus and Credit Cash for the amount of Bonus.
What is a contingency?
A condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur.
How are gain contingencies accounted for?
Not recorded, disclosed only if highly probable.
What are examples of gain contingencies?
Possible receipts from gifts, donations, asset sales, economic incentives, possible refunds from the government in tax disputes, pending court cases with a probable favorable outcome, and tax loss carryforwards.
What principle do gain contingencies follow?
The conservatism principle.
How are loss contingencies categorized?
Improbable, Reasonably Possible, and Remote.
How are probable losses accounted for?
Accrued (if estimable) and footnoted. If probable and estimable, debit the loss account and credit the liability account.
What is the accounting entry for a probable and estimable lawsuit loss?
Debit Lawsuit Loss and Credit Lawsuit Liability.
How are reasonably possible contingencies accounted for?
Footnoted.
How are remote contingencies accounted for?
Ignored.
What are common loss contingencies that are usually accrued?
Loss related to collectibility of receivables, obligations related to product warranties and defects, and premiums offered to customers.
What losses are not accrued?
Losses related to risk of loss or damage of enterprise property, general or unspecified business risks, and risk of loss from catastrophes assumed by property and casualty insurance companies.
What are contingencies that may be accrued related to losses?
Contingencies include the threat of expropriation of assets, pending or threatened litigation, actual or possible claims and assessments, guarantees of indebtedness of others, obligations of commercial banks under standby letters of credit, and agreements to repurchase receivables.
Examples of common loss contingencies include litigation, claims, and assessments.
What criteria must be met for losses to be accrued?
Losses should be accrued when both criteria of being probable and reasonably estimable are met.
What factors should be considered when determining whether to record a loss contingency?
Factors include the time period in which the action occurred, the probability of an unfavorable outcome, and the ability to make a reasonable estimate of the loss.
How should guarantee and warranty costs be treated under the cash basis method?
Under the cash basis method, warranty costs should be expensed as incurred if it is not probable that the liability has been incurred or if you cannot reasonably estimate the amount of the liability.
What is the preferred method for accounting for warranty costs?
The preferred method is the accrual basis method, which charges warranty costs to operating expense in the year of sale, matching expense with revenue.
This method is referred to as the ‘Expense Warranty Approach.’
How should premiums and coupons be accounted for?
The expense of premiums and coupons should be charged to the period of the sale. Estimate the liability and record the expense by estimating the number of premiums that customers will present for redemption.
What is an asset retirement obligation (ARO)?
An ARO must be recognized when a company has an existing legal obligation associated with the retirement of a long-lived asset and can reasonably estimate the amount of the liability. AROs should be recorded at fair value.
How is ARO cost treated in financial statements?
ARO cost is included in the carrying amount of the related long-lived asset.
What are examples of obligating events?
Dismantling, restoring, and reclamation of oil and gas properties; Decommissioning nuclear facilities; Closure, reclamation, and removal costs of mining facilities; Closure and post-closure costs of landfills.
How is the fair value of an obligation recorded when incurred?
Record fair value of obligation when it is incurred.
Example: 5 year life, 10% discount rate, dismantling removal cost of $1 million (NPV $620,920).
How is ARO allocated to expense over useful life?
Use straight line depreciation to allocate ARO to expense over useful life (⅛ per year).
Debit Accum Depr. on Asset; Credit Asset.
How is interest expense recorded for ARO?
Record interest expense each period (10%); ARO will grow each year by amount of interest expense.
Interest Expense ARO $62,092.
What is self-insurance?
Self Insurance is not insurance, but risk assumption. Little theoretical justification for establishment of liability. Don’t expense. Put a note - we are self insured for some risks.
How are current liabilities presented?
Current liabilities are usually recorded and reported at full maturity value. Generally presented first in liability and stockholders’ equity sections of balance sheet.
What should be included in the presentation of current liabilities?
Detail and supplemental information should provide full disclosure. Secured liabilities should be identified, along with related assets pledged as collateral.
What to do when a company will pay a currently maturing obligation from long-term assets?
Don’t include in current liabilities. Include a note to financial statements that discloses the general description of the financing agreement, the terms of any new obligation incurred or to be incurred, and terms of any equity security issued or to be issued.
How are gain contingencies presented?
Gain contingencies are not presented.
When should a company record a loss contingency?
Company records loss contingency and liability if loss is probable and estimable.
What to do if a loss is either probable or estimable?
Include in notes. Describe nature of contingency and estimate the liability, or disclose that estimate cannot be made.
What is long term debt?
Long term debt consists of a probable future sacrifice of economic benefit after one year or the operating cycle.
Obligations that are not payable within one year or the operating cycle.
What do bonds payable represent?
Bonds payable represent a promise to pay a sum of money at a designated maturity date, plus periodic interest at a specified rate on the maturity amount (face value).
What is a bond contract known as?
A bond contract is known as a bond indenture.
What are secured bonds?
Secured bonds are backed by a pledge of some sort of collateral, such as real estate or stocks and bonds of other corporations.
What are unsecured bonds?
Unsecured bonds are not backed by collateral and include debenture bonds and junk bonds, which are risky and pay a higher interest rate.
What are term bonds?
Term bonds are bonds that mature on a single date.
What are serial bonds?
Serial bonds are bonds that mature in installments and are frequently used by school districts and municipalities.
What are callable bonds?
Callable bonds give the issuer the right to redeem the bond prior to maturity.
What are convertible bonds?
Convertible bonds are convertible into other securities of the corporation for a specified time after issuance.
